Question

Incremental cost analysis calls for considering the following costs:

Relevant cost. Opportunity cost. Sunk cost.

Define these costs and indicate how they are used for incremental cost analysis.

Answer 1

Solution. A business exists to do business and meet its objective of profit making effeciently and effectively. Incremental cost analysis is a measure or tool which facilitates in decision making by revealing true cost and revenue differences between different alternatives. It calls for considering relevant cost and opportunity cost. It does not consider sunk cost.

Relevant cost encompasses costs that differ for different given alternatives and forms basis for computing incremental analysis.

Opportunity cost encompasses cost involved in losing second based alternative by making a decision and is also included or rather relevant for incremental analysis.

Sunk cost does not form part of incremental analysis as they are already made or are past costs and no decision in future affects or alters their value.